Military Startups: Myths And Reality of Cooperation With the State

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There are a great many myths about the defense industry. Perhaps, one of the most deep-rooted is its closure. Myths of the defense industry exist all over the world since the weapon category refers to something secret. However, the defense industry includes also other technologies that do not relate directly to deadly weapons.
This market is partially closed. However, it is gradually transforming and becoming open. First and foremost, this occurs due to global trends and economic phenomena. Nowadays only open industries are on the rise and tend to survive. Openness involves interaction with other related contractors and partners not only on domestic markets but on external ones as well. It matters a good deal. Systems cannot survive without openness, since they will lose their strategic flexibility and adaptivity to the inconsistent external environment. As of today, the Ukrainian defense industry is moving towards corporatization, and reorganization from the closed system to the open one within reasonable limits. The market is being developed and we are gradually becoming more open.
A great many inventors believe that it is impossible to reach out to Ukroboronprom if you have no relatives or friends working there. The question is – what you can offer? As a former employee of Spetstechnoexport (a subsidiary of Ukroboronprom), I can say without any doubt that there is a battle for a particularly innovative product. And this poses some problems. Another issue is about a cohort of scientists, who before time were linked with the old school and old management of the Ukrainian defense industry.
Not only the engineering component is of importance to us. We shall consider marketing and financial evaluation, business model estimation, economic analysis of one or another decision. This is basically what you need to reach out to Ukroboronprom. After all, the Concern is serving in various capacities. Full-scale production may be launched within the premises of Concern. Ukroboronprom engages experts, who conduct technical expertise and give their recommendations. In such a case, Ukroboronprom is no different from any private or state defense concern.
Well and truly innovative solutions make their way in the world. Whether it is easy or not – challenging issue. But one cannot enlist support if the information is provided improperly. You shall admit that if a developer is unable to explain the substance of his proposal, no one will believe him. For all effects and purposes, I see no communication problem, if your product settles some problem in an innovative way and the technical parameters of your solution are innovative.
Yet another popular myth are conservatism of the defense industry and reluctance to implement the advanced developments. The question at issue is where exactly these developments are directed. We shall first separate Ukroboronprom from the Ministry of Defense as the possible customer and purchaser of innovative developments. In other words, when it comes to the development of a product, the Concern is mainly manufacturing and selling rather than purchasing. This is an export-oriented company interested in the sale of new developments.
When it comes to the implementation of new production solutions, the basic limitations, I believe, are generated not by the very readiness of Ukroboronprom. The problem resides in legislative frameworks that regulate the activity of the Concern. That is to say that to some extent this conservatism is regulated by an obsolete regulatory framework, namely by the failure to establish joint ventures with foreign and private partners. This is atavism number one. However, the Concern is trying to get over it and open the door to joint enterprise establishment.
The Concern is currently open enough in terms of its policy, intentions and actions. Bulk information may be found about transformations that take place there. But still – what to compare with? With American DARPA? American agency is the leader in innovative solutions in the defense industry. If we compare the Concern with other institutions or private organizations in Ukraine, we will see that it is the most successful and dynamically developing enterprise.
Those, who bear a relation to the defense field, believe that it is “overregulated” in a certain manner. Not every business can operate under such conditions. In sober fact, overregulation of the field is the question for judicial reform. Regulatory traps relate not so much to Ukroboronprom, as to the Cabinet of Ministers, the Parliament and our president. That is, the Сoncern would be glad to liberalize the legislative requirements and to change its activity base, provided such changes are reasonable like it works in various developed countries, such as the USA, the UK, Israel, etc. A simple inability to establish joint ventures looks like barbarism.
It is not infrequent that innovations are treated as the possibility to “share out” funds. A short time ago this verbal statement was made by one of the directors of the Concern. As if, for historical reasons, any innovations in the defense industry are just the occasion for budget funds stealing. Thefts used to occur wherever the budget funds were. For what purpose were the funds disbursed? For innovative solutions in the defense industry, in particular.
Very few understand what innovation stands for, how to determine it, and what exactly kind of innovativeness criteria you will choose. For this purpose, we shall develop and adopt the determination procedure for the innovativeness or non-innovativeness of the product. Currently, the set of legislative provisions prevents innovativeness determination. The innovation itself is determined in a broad sense, Ukraine has no generally accepted expert evaluation of innovative projects.
On the other hand, we have some logic and reasoning in product innovativeness evaluation. The Innovations Development Platform, for instance, has its own evaluation algorithm and may show at no charge how innovative your product is. Sure thing, if you are the urban crazy and decide to create a spacecraft… But even in this case, we will advise you what technical expert can help you.
At this present time, the Сoncern’s enterprises and defense industry enterprises pay 75% of their profits to the state in the form of dividends. In other words, the Сoncern’s enterprises form a profitable structure. The remaining share of profit is directed into support and irreducible development of the industry.
Problems that the Concern is currently facing for innovations involve not only “share out” of funds. Law-enforcement authorities have a specific perception of money invested in innovations. This is because the Security Service of Ukraine is checking most of the developments in the defense industry. This causes lots of trouble. Nowadays the Concern’s enterprises help to commercialize new products and solutions. In other words, these newly developed products are not quite from the private sector. And even if that is so, this is done in cooperation with the public sector.
Those budget funds that may be directed into innovations are chicken feed. There is nothing to be “shared out”. Market leaders realize that best efforts shall be made to develop new products, namely to come into international markets by selling new products. Otherwise, market share will be decreased and diffused. Market leaders see dynamics and are interested in decision-making. People are afraid to put up their own money. But this refers to judicial reform and failure to protect investors’ rights. Therefore, one shall not blame the defense industry for this state of affairs.
Dmytro Shestakov, 2018
Originally published in Innovation House